Key elements of nearshoring: It’s all about the data
Nearshoring is a commitment not to be taken lightly. It’s important to start with the question: Is nearshoring right for you? The first step is to evaluate whether making a change to your supply chain from where it is now is a good fit for your company. That means assessing whether or not nearshoring makes sense for you. It is more than simply a theoretical question: Most of the risks and disadvantages of nearshoring have more to do with such factors as poor planning or lack of proper due diligence than the business model itself.
Let the data do the talking:
Companies considering nearshoring have to understand the data that moves their business. Nearshoring offers a higher return on investment and focuses on providing value to the client, rather than providing the lowest possible rates. For nearly two decades, manufacturers of labor intensive products have steadily been offshoring the most labor-intensive aspects of their business to China, where labor was plentiful and cheap. What will it mean to the business in moving operations to a new location? In the case of manufacturer who set up shop in China 20 years ago to take advantage of cheap labor and is considering nearshoring, that company might be hard-pressed to manufacture the product competitively. Even with the cost of labor in China rising, you'd be hard pressed to make it competitively. When you add everything else, including freight, to make it a way you could turn a profit by, say, make it in Mexico or in the US, because the labor difference is so significant. Understanding the data and having a confident model on which to decide what to do.
Geopolitics is economics:
Another key point is to evaluate the nearshoring location on the basis of its history and anticipated future actions as it relates to trade and tariffs. What's the relationship of that country with the United States in terms of trade, tariffs, and commercial, sociopolitical and geopolitical relations? Those are factors that have to be considered so that you don't land in a spot that could just create more problems down the road.
Companies may want to create a mirror of their operation in some other location — not just to the test the waters, but also to have a well-managed redundancy in their supply chain. So that if an issue happens with their supply chain from China, for example, their nearer mirror operation one in Mexico can still function and provide what they need, at least to some capacity, as opposed to being entirely shut down. The mirroring approach is one that many companies use when they look at expanding capacity, but doing it closer to home than they might have done before.
The benefits of moving operations closer to home include working in the same time zone, fewer cultural differences, greater cost-effectiveness, proximity allowing face-to-face meetings and faster communication and more timely decision-making and problem solving.
- Time Zone: Proximity allows you to be in a similar time zone, making it easier to have face-to-face meetings and manage work.
- Cultural similarities: Nearshoring operations in neighboring locations like Canada or Mexico tends to lead to fewer differences in culture — and therefore better communications. When it comes to countries in Asia, there is a huge cultural difference with the US resulting in misunderstandings and complications that can slow operations.
- Cost-effectiveness: nearshoring leads to better management, and faster communication, which saves a company a lot of money. However, another factor that contributes to its cost-effectiveness is that talent and labor in other countries may also be cheaper.
- Quicker response time: In addition to fluid management and controls, there is also an indisputable quicker response time. This is because when both parties can quickly communicate and solve problems as they are both active at the same time.
- Flexibility: When a company nearshores operations, they free themselves from those responsibilities, giving them more time and flexibility to focus on other aspects of the business.
- No relocation necessary: nearshoring requires no relocation, meaning a company doesn’t need to invest heavily in new assets like moving to a new office in another country.
- Talent development: Finally, a key consideration for senior leaders is that nearshoring, together with the resulting analysis surrounding the decision, provides an opportunity to develop talent. When a company chooses to evaluate nearshoring and reconsider the things they've been doing for the past 25 years — whether that is either launch a new facility closer to home or wind one down in Asia and spin a brand new one — it is an opportunity to strengthen the leadership team. It provides senior leadership with the opportunity to help your team hone its skills of foresight, advanced planning, the use of sophisticated tools to model and take a data-driven approach to making a decision that's complex and can actually change the business.
This, in turn, resonates with the future generation of leadership: It creates a sense of greater purpose as to why you're coming to work. From a talent nurturing and retention perspective, you're giving an opportunity for someone to potentially change his/her career in a good way.
Despite its many benefits, nearshoring faces a number of hurdles. Some of those barriers are cultural. For some organizations there is a fear of the new, of change and of taking aggressive action; as a result, companies stay on the sidelines, overcome by inertia and paralysis.
For others, it is a sense that the company has to go it alone. They believe, rightly, that they are the experts on their business and that analyzing and assessing the pros and cons of nearshoring is something they can do on their own.
The problem is that most middle market manufacturers are already resource constrained: their current team already has a full-time day job that draws on all their energy and talents. And while they may feel they can do it on their own — they’re capable of conducting these complex analytics to making assertions about things that they believe they know, like global trade, and be able to model what it should look like before they invest in nearshoring or onshoring — most companies, especially middle market ones, lack the human resources and talent to do this stuff. They're dealing with fighting today's fire. They get suboptimal results in an attempt to try to understand should we nearshore or not, because the people being asked to do the work often find them overworked as it is. The outcome is that the quality of the analysis seldom puts them in a position to make a confident, educated decision. That becomes an unintentional kicking of the can.